by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
I never post my Mortgage Rates Reports here. They’re boring unless you are thinking about buying a home or refinancing your mortgage. Today, it seems plausible that the Fed is shifting its open market activities from buying treasuries, to buying mortgage-backed securities, in order to bolster liquidity in the mortgage industry.
We call this phenomenon stagflation and it’s REALLY bad for the economy. The Fed has been aggressively cutting interest rates and the declining housing market is closing down mortgage companies, investment banking firms, and real estate brokerages. What more can the Fed do to help?
The Fed can (and will) buy mortgage-backed securities.
Rather than to buy treasury notes in the open market, the Fed will be buying mortgage-backed securities. They will want to get those assets off investment banking firms’ balance sheets and provide stability to the MBS market. Remember when I said that only the uneducated pay attention to the treasury note to determine the direction of mortgage rates? Today is proof.
The spread between treasury notes and mortgage-backed securities has been widening these past six weeks. Why? America was considered to be a sub-prime nation; everybody was expected to default on their home loans. Expect the Fed to prop up the MBS market in the next 4-6 weeks. That will be bad for treasury notes and good for MBS.
Remember when I compared this to the junk bond crisis of the early 90’s and advised you not to panic? Now is the time to take action. There will be some great opportunities to lock into a low mortgage rates during the rest of this month. If you’re closing a loan in less than 14 days, lock your rate. Otherwise, float and see mortgage rates decline a bit.
Thoughts? I don’t care if it’s good or bad policy, I care if its a realistic move on the Fed’s part. I think they’re doing it now and will increase that activity in the near-term. If I’m right, we’ll see lower mortgage rates and the Treasury/MBS spread will narrow.
Craig Tone says:
Brian, I didn’t see you use the ‘B’ word. Isn’t this a federal BBBBBbailout?
What happens when the institutions selling MBS to the Fed go kaput?
March 18, 2008 — 4:17 pm
Brian Brady says:
I prefer “intervention” Craig.
The Fed can’t “purchase” MBS without legislative action…unless, it is deemed to be a national emergency (or national security- I’m not certain). Today, the Fed is accepting the MBS as collateral against short-term loans. Should those loans default, they could “write them off” as bad debt, which is, in essence, purchasing those loans for par.
Is this “plausible”..yes. Is this prudent? Perhaps. One of the Fed’s defined directives is to provide stability to financial markets. Financial markets are clearly unstable.
I have some other ideas I’ll be writing about later.
March 18, 2008 — 4:41 pm
Craig Tone says:
Bear Stearns et al becometh the growing sickness called moral hazard. One would have to be blind not to notice and even then, by now you’d bump into it or smell something. All that the Fed doeth for that matter is at the expense of taxpayers, correct?
The quasi-governmental identity of GSEs is only desirable when they’re making money after all…
Stagflation is not my friend and I’ll add that he has bad breath.
March 18, 2008 — 5:58 pm
Robert Kerr says:
The Fed can (and will) buy mortgage-backed securities.
I fear you may be right. Apparently, the precipitous 50% plunges of Fannie and Freddie last week went largely unnoticed.
Is this the new economy? The Fed on a white horse, throwing sack after sack of taxpayer dollars into the fire? One with no moral hazard, no hard lessons learned, no consequences to risk?
It sure looks like it.
March 18, 2008 — 7:26 pm
Brian Brady says:
We did similar things with the RTC in 1989-92. Remember that? Now, we got lucky because interest rates dropped, the bonds appreciated, and the collateral (real estate) went up.
Will the taxpayers get stung for the default mess? Maybe. Perhaps we can offer gov’t solutions to the mess and accelerate the “retirement entitlements” to homeowners. Stay tuned for a crazy idea.
March 18, 2008 — 7:58 pm
Sean Carr says:
With all the above being true, investments backed by USD will continue to become increasingly unpalatable. Value the DOW or real estate in gold or a strong currency and the drop is shocking. A bailout of this magnitude is inherently at odds with a strong currency policy.
March 18, 2008 — 8:19 pm
Robert D. Ashby says:
Brian – well said. The Fed has only begun to “intervene” as you put it. With them running out of other options, they will have get even more creative to provide the intervention they feel necessary.
I proposed another dilemma over at my own site. That is, if the Fed keeps cutting rates and commodities keep rising, how many more Americans will end up unable to afford their mortgage due to the increased cost of living?
Far off? Maybe. But if inflation continues to grow, whether through commodities or not, it could theoretically become a reality. South Florida leads in fraud, top 3 in foreclosures, and we lead the nation in inflation as well.
March 19, 2008 — 6:12 am
Michael Cook says:
Lets not forget about the Fannie and Freddie news today as well. With their plan to buy $200 billion worth of these securities, I have to think that the market will settle soon. Though if consumers continue to default, there will still be a negative impact on the price of these securities.
March 19, 2008 — 11:47 am
Brian Brady says:
“Lets not forget about the Fannie and Freddie news today as well.”
I was wrong. The Fed didn’t do it, private corporations did (wink, wink)*
*Fannie and Freddie are GSEs- technically they are private corporations (with an unlimited line of credit to the U.S.Treasury).
Thanks for stopping by, Michael- I love getting more opinion from the Street
March 19, 2008 — 12:16 pm